5 Reasons Buying a Home Now – Makes Mathematical sense, and yes, yes, I know that Rates are Expected to Come Down!
Real Estate Agents and Mortgage Loan officers aren’t blind to the facts that the market is really tough on homebuyers right now. Homebuyers are doing the cost benefit analysis in their mind about “is this new higher payment worth it” while also fighting low inventory.
How did we get here?
1) Buyers Choosing Payment over Price: In 2019 – June”ish” of 2022, I believe folks weren’t necessarily looking at what the price tag was on a home – and rather, I think they were more focused on what their monthly payment was. As a result, a house going for $50,000 over asking was ‘acceptable’, because in a low-rate environment, the monthly payment wasn’t as impacted as what it is in today’s environment. Home values in this three-and-a-half-year period rose an incredible 50.2%! Despite this dramatic rise, there are no institutions expecting prices to retreat (including, The National Association of Realtors, the federal agencies of Fannie Mae and Freddie Mac, The Board of Governors at the Federal Reserve, Wells Fargo, Bank of America, etc.).
2) Choosing Payment over Position: With rates coming back to a long term ‘normal’, the refinance boom over, and with nearly 60% of homeowners with rates at 4% or below, folks are choosing to stay in the payment and their current home longer rather than adapting buying a new home to adapt to their new position in life.
- Retirees are choosing to stay (or perhaps rent out?) the home that has a master bedroom on the second floor (oh, my knees hurt just thinking about that!) rather than downsizing and purchasing a ‘Master on the main’ home.
- The family that has grown in size and would naturally upgrade and buy a bigger house, is choosing to stay in that first time homebuyer’s house – just a little bit longer.
- That First Time Homebuyer that doesn’t know anything different from today’s rates is having trouble finding a home because that family listed in bullet point b – just ain’t moving – and they aren’t moving because the folks listed in bullet point a are staying put!
All that said, and believe it or not, year to date in 2024 – literally tens of millions of homes have been bought and sold so far this year in the United States. What do they know that presumably folks sitting on the sidelines are missing? Let’s not talk about opinions… let’s look at this in terms of math and maybe some economics.
1) Home Prices are not forecasted by anyone, anywhere to go down. In June of 2024, the National Association of Realtors report that home prices are up nationally, 4.1% year over year. Mathematically, that means a $400,000 home last June is now sold for $416,400 this year. On a 20% down payment, and a rate at 6%, you would have paid $19,903 in interest on this mortgage. More on that next…
2) As all homeowner know, you can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000. So lets go back to that $19,903 in interest that is paid, and assume that a married couple makes $100,000 a year. On their Federal Tax returns they lowered their tax base to $80,097. Assuming a 25% tax rate, they literally put $4,976 back in their pockets. RENT DOES NOT HAVE THE SAME TAX BENEFIT.
3) You can always refinance in the future if the opportunity presents itself. Mortgage rates are back to ‘normal’. In the 1990s, rates ranged between 7% and 9%, and in the 2000s they typically fell between 5% and 7%. Ironically, as I type this article, the Federal Reserve just concluded their closed-door July meeting and released their notes. So as long as this soft-landing sticks, it seems that the door is open for them to start lower the Federal Funds rate in the fall and into 2025. This slowly but surely will trickle down to mortgage rates, more on that next…
4) Supply and Demand. Remember when I talked about home prices accelerating because of lower rates? With mortgage rates predicted to fall – do you think there will be more competition between homebuyers or less? Because of this, I think there is a chance that we might see the gas pedal pressed down on home prices starting as early as Spring of 2025. Do you want to be buying a home when there is high competition for the same home, or less? According to the National Association of Realtors, houses for sale are getting fewer offers this summer compared to last. A home listed for sale received an average of 2.9 offers in June, down from 3.5 offers per home last year. What do you think that number will be if interest rates drop to 5%?
5) Time in the Home. Father Time is never on our side. We are all getting older, one day at a time. This potentially limits the time we own a house to help generate wealth. According to Zillow the average homeowner stays in their house 14 years (that’s really high in comparing it to our family!) before listing it. Let’s go back to that example of purchasing a home at $400,000 and the appreciation rate being 4.1% (let’s use that as an average for the entire time of owning the house). Holding that house for 13 years instead of 14 years because you decided to sit on the sidelines equals a potential $27,651 lost in opportunity from the appreciation of the home.
I think Father Time might quote Andy Dufresne and advise us all to “Get busy living or get busy dying”. When the time is right for you to buy or sell, I’ve always told my clients that you’ll likely feel it in your gut – or perhaps it simply comes about because of a dramatic change in life’s endless events (divorce, new kiddo, kiddos off to college, retirement, etc).
I challenge you to ask yourself though, if you are on the sidelines – is it really because of the math? Or is there a deeper reason? All answers are right, after all it’s you that must make the payment – not me. Generally speaking, owning a home has been a stable investment.
I suspect the buyers that had the courage to get off this sidelines this summer will be glad they did so, come this time next year.
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.